ONE Gas Announces Fourth Quarter and Full Year 2019 Financial Results

TULSA, Okla., Feb. 19, 2020 /PRNewswire/ -- ONE Gas, Inc. (NYSE: OGS) today announced its fourth quarter and full year 2019 financial results, which included diluted earnings per share of $0.96 and $3.51, respectively.

Highlights include:

• Fourth quarter 2019 net income was $51.2 million, or $0.96 per diluted share, compared with $44.7 million, or $0.84 per diluted share, in the fourth quarter 2018;
• Full year 2019 net income increased to $186.7 million, or $3.51 per diluted share, compared with $172.2 million, or $3.25 per diluted share, in 2018;
• Full year 2019 capital expenditures and asset removal costs were $465.1 million, compared with $447.4 million in 2018; and
• On Jan. 21, 2020, the company increased its quarterly dividend 4 cents to 54 cents per share, or $2.16 per share on an annualized basis, payable on March 6, 2020, to shareholders of record at close of business Feb. 21, 2020.

"We are pleased to close out the decade with a year of strong financial results," said Pierce H. Norton II, president and chief executive officer. "As we move into a new decade, we will continue to focus on modernizing and expanding our pipelines while providing a safe, reliable and affordable energy choice for our customers."

FOURTH QUARTER 2019 FINANCIAL PERFORMANCE

ONE Gas reported operating income of $82.0 million in the fourth quarter 2019, compared with $80.8 million in the fourth quarter 2018.

Net margin, which is comprised of total revenues less cost of natural gas, increased by $16.3 million compared with fourth quarter 2018, which primarily reflects:

• A $14.6 million increase from new rates; and
• A $1.7 million increase attributed to net residential customer growth in Oklahoma and Texas.

Fourth quarter 2019 operating costs were $133.9 million, compared with $123.8 million in the fourth quarter 2018, which primarily reflects:

• A $6.2 million increase in employee-related expenses; and
• A $3.7 million increase in bad debt expense.

Fourth quarter 2019 depreciation and amortization expense was $46.1 million, compared with $41.1 million in the fourth quarter 2018, due primarily to an increase in depreciation expense from capital investments placed in service.

Capital expenditures and asset removal costs were $121.2 million for the fourth quarter 2019, compared with $128.9 million in the fourth quarter 2018, due primarily to increased information technology costs in December 2018.

Fourth Quarter 2019 Key Statistics: More detailed information is listed in the tables located in the Appendix.

• Actual heating degree days across the company's service areas were 4,078 in the fourth quarter 2019, 6% colder than normal and 6% warmer than the same period last year;
• Actual heating degree days in the Oklahoma service area were 1,451 in the fourth quarter 2019, 12% colder than normal and 7% warmer than the same period last year;
• Actual heating degree days in the Kansas service area were 1,878 in the fourth quarter 2019, 3% colder than normal and 6% warmer than the same period last year;
• Actual heating degree days in the Texas service area were 749 in the fourth quarter 2019, 5% colder than normal and 6% warmer than the same period last year;
• Residential natural gas sales volumes were 41.8 billion cubic feet (Bcf) in the fourth quarter 2019, down 6% compared with the same period last year;
• Total natural gas sales volumes were 55.0 Bcf in the fourth quarter 2019, down 6% compared with the same period last year;
• Natural gas transportation volumes were 59.4 Bcf in the fourth quarter 2019, up 2% compared with the same period last year; and
• Total natural gas volumes delivered were 114.4 Bcf in the fourth quarter 2019, down 2% compared with the same period last year.

FULL YEAR 2019 FINANCIAL PERFORMANCE

Full year 2019 operating income was $295.3 million, compared with $288.4 million in 2018.

Net margin, which is comprised of total revenues less cost of natural gas, increased $45.7 million compared with last year, which primarily reflects:

• A $36.2 million increase from new rates;
• A $6.5 million increase attributed to net residential customer growth in Oklahoma and Texas;
• A $1.9 million increase due to higher transportation volumes in Kansas; and
• A $1.2 million increase due to higher sales volumes, net of weather normalization, in Texas; offset by
• A $0.9 million decrease due to a compressed natural gas excise tax credit.

Full year 2019 operating costs were $489.1 million, compared with $470.6 million in 2018, which primarily reflects:

• A $10.1 million increase in employee-related expenses;
• A $2.6 million increase in outside services costs;
• A $1.8 million increase in materials for pipeline repair and maintenance activities;
• A $1.5 million increase in bad debt expense;
• A $1.3 million increase in fleet costs; and
• A $1.1 million increase in legal-related expenses.

Full year 2019 depreciation and amortization expense was $180.4 million, compared with $160.1 million in 2018, due primarily to an increase in depreciation expense from capital investments placed in service, higher depreciation rates in Kansas and an increase in amortization of the ad-valorem surcharge rider in Kansas.

Full year 2019 other expense, net, decreased $8.4 million due primarily to earnings on investments associated with nonqualified employee benefit plans, which offset the increase in costs for the plans included in operating costs.

Interest expense increased $11.4 million for the full year 2019 compared with the same period last year, resulting primarily from the refinancing of the company's $300 million senior notes, at a 2.07% interest rate, with $400 million senior notes, at a 4.50% interest rate, due November 2048.

Income tax expense for the full year 2019 includes amortization of excess accumulated deferred income taxes of $12.8 million, which is offset in revenues.

Full year 2019 capital expenditures and asset removal costs were $465.1 million, compared with $447.4 million in 2018, due primarily to increased system integrity activities and extending service to new areas.

The company ended the fourth quarter 2019 with $17.9 million of cash and cash equivalents, $516.5 million of commercial paper outstanding and $698.8 million of remaining credit available under its $700 million credit facility. The total debt-to-capitalization ratio at Dec. 31, 2019, was 46%, and the ratio of long-term debt-to-capitalization was 38%.

REGULATORY UPDATE

Kansas

In August 2019, Kansas Gas Service submitted an application to the Kansas Corporation Commission (KCC) requesting an increase of approximately $4.2 million related to its Gas System Reliability Surcharge (GSRS). In November 2019, the KCC approved the increase effective December 2019.

Texas

Texas Gas Service filed a rate case for all customers in the Central Texas and Gulf Coast service areas seeking a rate increase of $15.6 million, and requested to consolidate the two service areas into one. If approved, new rates are expected to become effective in the third quarter of 2020.

2020 FINANCIAL GUIDANCE

On Jan. 21, 2020, ONE Gas announced that its 2020 net income is expected to be in the range of $186 million to $198 million, or $3.44 to $3.68 per diluted share.

Capital expenditures, including asset removal costs, are expected to be approximately $475 million in 2020, with approximately 70% of these expenditures targeted for system integrity and replacement projects.

EARNINGS CONFERENCE CALL AND WEBCAST

The ONE Gas executive management team will conduct a conference call on Thursday, Feb. 20, 2020, at 11 a.m. Eastern Standard Time (10 a.m. Central Standard Time). The call also will be carried live on the ONE Gas website.

To participate in the telephone conference call, dial 888-254-3590, pass code 8787949, or log on to www.onegas.com/investors and select Events and Presentations.

If you are unable to participate in the conference call or the webcast, a replay will be available on the ONE Gas website, www.onegas.com, for 30 days. A recording will be available by phone for seven days. The playback call may be accessed at 888-203-1112, pass code 8787949.

NON-GAAP INFORMATION

ONE Gas has disclosed net margin in this news release, which is considered a non-GAAP financial metric used to measure the company's financial performance. Net margin is comprised of total revenues less cost of natural gas. Cost of natural gas includes commodity purchases, fuel, storage, transportation and other gas purchase costs recovered through our cost of natural gas regulatory mechanisms and does not include an allocation of general operating costs or depreciation and amortization. In addition, these regulatory mechanisms provide a method of recovering natural gas costs on an ongoing basis without a profit. Therefore, although our revenues will fluctuate with the cost of natural gas that we pass through to our customers, net margin is not affected by fluctuations in the cost of natural gas. Accordingly, we routinely use net margin in the analysis of our financial performance. We believe that net margin provides investors a more relevant and useful measure to analyze our financial performance as a 100% regulated natural gas utility than total revenues because the change in the cost of natural gas from period to period does not impact our operating income. A reconciliation of net margin to the most directly comparable GAAP measure is included as a table at the end of the earnings tables accompanying this release.

ONE Gas, Inc. (NYSE: OGS) is a 100% regulated natural gas utility, and trades on the New York Stock Exchange under the symbol "OGS." ONE Gas is included in the S&P MidCap 400 Index and is one of the largest natural gas utilities in the United States.

ONE Gas, headquartered in Tulsa, Oklahoma, provides natural gas distribution services to more than 2 million customers in Kansas, Oklahoma and Texas. Its divisions include Kansas Gas Service, the largest natural gas distributor in Kansas; Oklahoma Natural Gas, the largest in Oklahoma; and Texas Gas Service, the third largest in Texas, in terms of customers.

For more information, visit the website at www.onegas.com.

Some of the statements contained and incorporated in this news release are forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. The forward-looking statements relate to our anticipated financial performance, liquidity, management's plans and objectives for our future operations, our business prospects, the outcome of regulatory and legal proceedings, market conditions and other matters. We make these forward-looking statements in reliance on the safe harbor protections provided under the Private Securities Litigation Reform Act of 1995. The following discussion is intended to identify important factors that could cause future outcomes to differ materially from those set forth in the forward-looking statements.

Forward-looking statements include the items identified in the preceding paragraph, the information concerning possible or assumed future results of our operations and other statements contained or incorporated in this news release identified by words such as "anticipate," "estimate," "expect," "project," "intend," "plan," "believe," "should," "goal," "forecast," "guidance," "could," "may," "continue," "might," "potential," "scheduled," "likely," and other words and terms of similar meaning.

One should not place undue reliance on forward-looking statements, which are applicable only as of the date of this news release. Known and unknown risks, uncertainties and other factors may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by forward-looking statements. Those factors may affect our operations, markets, products, services and prices. In addition to any assumptions and other factors referred to specifically in connection with the forward-looking statements, factors that could cause our actual results to differ materially from those contemplated in any forward- looking statement include, among others, the following:

• our ability to recover operating costs, income taxes and amounts equivalent to the cost of property, plant and equipment, regulatory assets and our allowed rate of return in our regulated rates;
• our ability to manage our operations and maintenance costs;
• changes in regulation of natural gas distribution services, particularly those in Oklahoma, Kansas and Texas;
• the economic climate and, particularly, its effect on the natural gas requirements of our residential and commercial customers;
• competition from alternative forms of energy, including, but not limited to, electricity, solar power, wind power, geothermal energy and biofuels;
• conservation and energy storage efforts of our customers;
• variations in weather, including seasonal effects on demand, the occurrence of storms and disasters, and climate change;
• indebtedness could make us more vulnerable to general adverse economic and industry conditions, limit our ability to borrow additional funds and/or place us at competitive disadvantage compared with competitors;
• our ability to secure reliable, competitively priced and flexible natural gas transportation and supply, including decisions by natural gas producers to reduce production or shut-in producing natural gas wells and expiration of existing supply and transportation and storage arrangements that are not replaced with contracts with similar terms and pricing;
• the mechanical integrity of facilities operated;
• operational hazards and unforeseen operational interruptions;
• adverse labor relations;
• the effectiveness of our strategies to reduce earnings lag, margin protection strategies and risk mitigation strategies, which may be affected by risks beyond our control such as commodity price volatility and counterparty creditworthiness;
• our ability to generate sufficient cash flows to meet all our liquidity needs;
• changes in the financial markets during the periods covered by the forward-looking statements, particularly those affecting the availability of capital and our ability to refinance existing debt and fund investments and acquisitions;
• actions of rating agencies, including the ratings of debt, general corporate ratings and changes in the rating agencies' ratings criteria;
• changes in inflation and interest rates;
• our ability to recover the costs of natural gas purchased for our customers;
• impact of potential impairment charges;
• volatility and changes in markets for natural gas;
• possible loss of local distribution company franchises or other adverse effects caused by the actions of municipalities;
• payment and performance by counterparties and customers as contracted and when due;
• changes in existing or the addition of new environmental, safety, tax and other laws to which we and our subsidiaries are subject;
• the uncertainty of estimates, including accruals and costs of environmental remediation;
• advances in technology, including technologies that increase efficiency or that improve electricity's competitive position relative to natural gas;
• population growth rates and changes in the demographic patterns of the markets we serve, and conditions in these areas' housing markets;
• acts of nature and the potential effects of threatened or actual terrorism and war;
• cyber attacks or breaches of technology systems that could disrupt our operations or result in the loss or exposure of confidential or sensitive customer, employee or company information;
• the sufficiency of insurance coverage to cover losses;
• the effects of our strategies to reduce tax payments;
• the effects of litigation and regulatory investigations, proceedings, including our rate cases, or inquiries and the requirements of our regulators as a result of the Tax Cuts and Jobs Act of 2017;
• changes in accounting standards;
• changes in corporate governance standards;
• discovery of material weaknesses in our internal controls;
• our ability to comply with all covenants in our indentures and the ONE Gas Credit Agreement, a violation of which, if not cured in a timely manner, could trigger a default of our obligations;
• our ability to attract and retain talented employees, management and directors;
• unexpected increases in the costs of providing health care benefits, along with pension and postretirement health care benefits, as well as declines in the discount rates on, declines in the market value of the debt and equity securities of, and increases in funding requirements for, our defined benefit plans;
• the ability to successfully complete merger, acquisition or divestiture plans, regulatory or other limitations imposed as a result of a merger, acquisition or divestiture, and the success of the business following a merger, acquisition or divestiture; and
• the costs associated with increased regulation and enhanced disclosure and corporate governance requirements pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

These factors are not necessarily all of the important factors that could cause actual results to differ materially from those expressed in any of our forward-looking statements. Other factors could also have material adverse effects on our future results. These and other risks are described in greater detail in Part 1, Item 1A, Risk Factors, in our Annual Report. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these factors. Other than as required under securities laws, we undertake no obligation to update publicly any forward-looking statement whether as a result of new information, subsequent events or change in circumstances, expectations or otherwise.

APPENDIX

SOURCE ONE Gas, Inc.